IRS Releases New Proposed Partnership Schedules (K-2 and K-3) for International Tax Reporting

If you’re a U.S. partnership with international items of relevance (i.e., foreign partners or foreign activities), you will likely be required to file new Schedules K-2 and K-3 for 2021 tax year (2022 filing season), along with Schedule K-1.

The new forms are extensive (K-2 is 20 pages and K-3 is 23 pages long) and are designed to supplement and clarify the former Form 1065 international information and provide partnerships a “standardized format” for reporting international tax information.

Domestic partnerships with no international tax items to report would not be affected by the proposed changes.

Currently, partnerships report foreign tax information in Box 16 of Part III in Schedule K-1, as well as Box 20 “other information” by attaching narrative statements to K-1s. These statements are presented in a variety of formats, which make it difficult for partners to correctly interpret and report on their own tax returns. The new proposed schedules are designed to streamline this process by better aligning the information provided by partnership with the tax forms partners use. The new draft Schedule K-2 (Form 1065), Partners’ Distributive Share Items – International would replace portions of Schedule K-1, Part III, lines 16(a) through 16(r) and Schedule K-3 (Form 1065), Partner’s – Share of Income, Deductions, Credits, etc. – International would replace portions of Schedule K-1, Part III, Boxes 16 and 20.  Draft formats are available through the IRS website.

Public commenting for new schedules ended on Sept 14, 2020. The IRS is expected to release final forms later this year. Overall, the new designed schedules will create additional complexities and increased tax compliance to applicable partnerships, as the draft schedules do not replace existing reporting requirements but are intended to provide more detailed information to their partners.

For more information about this topic, including reporting requirements for all entities with international activities, please contact your Schneider Downs international tax advisor.